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In today’s highly complex global sourcing environment, apparel companies must aggressively explore more opportunities, including the pursuit of new sourcing countries and partners, increasing value-added services and upping supply chain efficiency.
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Seventh Annual Apparel Research Study & Analysis: Excellence in Global Sourcing
An Apparel Exclusive Report
Although mounting consumer expectations, omnichan-nel pressure and heightened competition are drivingdiscussions around revaluating production locations,
supplier relationships and even overall sourcing strategy, cost isstill king.
In fact, in this year’s Seventh Annual Excellence in GlobalSourcing Survey, produced by Kurt Salmon and Apparel,respondents still chose cost drivers as their top macro-econom-ic concerns, with their top three being the price of raw materi-als (occupying the top spot for the third year running), wagerates and customs logistics issues.
And for good reason. Although they have come downsince their peak in early 2011, raw material costs remain anarea of significant concern. This is especially true for cotton,which is now showing signs of ticking up again.The result canbe a serious impact to margins. For example, Hanesbrandsplans to exit its unbranded apparel business in the United
States and focus on its Outer Banks sportswear label in aneffort to prop up falling margins, which have decreased morethan nine percentage points over the last two quarters as aresult of raw materials costs, according to Thomson ReutersStarMine data.
Wage rates are an area of even greater potential marginerosion. According to national statistics, the growth rate forthe hourly wage rate in China grew at more than 83 percentbetween 2007 and 2012. Compare this to other major Asianlocations such as South Korea at 17.9 percent growth, HongKong at 12.3 percent and Japan at -4.2 percent and itbecomes apparent that the trend is driving a shift in sourcing.Although China still produces the lion’s share of U.S. appar-el, footwear and furniture, annual double-digit wage increas-es have enticed many companies to shift production to lower-wage countries in Southeast Asia and Latin America andcontinue to look elsewhere.4
By Joanna Shapiro, Manager & Courtnay Thomas, Senior Consultant, Kurt Salmon
26 EXCELLENCE IN GLOBAL SOURCING
In today’s highly complex global sourcing environment, apparel companies must aggressively
explore more opportunities, including the pursuit of new sourcing countries and partners,
increasing value-added services and upping supply chain efficiency.
FIGURE 2: Percent Hourly Wage Rate Growth 2007-2012 - Select CountriesFIGURE 1: Trend of Top 3 Macro-Economic Concerns
2010
• Wage rates/issues• Price of oil• Price of raw materials
2011
• Price of raw materials• Price of oil• Wage rages/issues
2012
• Price of raw materials• Increasing internal/domestic
demand in China• Price of oil
2013
• Price of raw materials• Wage rates/issues• Port/customs or logistics issues
China83.7
Hong Kong12.3
Philippines26.2
South Korea17.9Japan
-4.2
Brazil57.2
Colombia10.2
Mexico16.1
Nicaragua41.3
An Apparel Exclusive Report
28 EXCELLENCE IN GLOBAL SOURCING
Finally, new to the top concerns list is a focus on port andcustoms logistics issues. Within a year, the importance of thistopic jumped more than 10 percent as the complexity of retail-ers’ and wholesalers’ supply chains grows — along with themounting stakes of delayed shipments. Issues such as lastyear’s narrowly averted port strike, which would have shutdown 14 container ports from Maine to Texas, weigh heavily onthe minds of many sourcing executives.
These three concerns combine to create considerable pres-sure on retailers and wholesalers to rethink their existing sourc-ing and supply chain strategies. No one company has found theanswer. Our research shows that companies sourcing moreheavily from China and other Asia Pacific countries are moreconcerned about oil prices, wage rates and customs issues thanother respondents. On the other hand, companies that are cur-rently sourcing in Sub-Saharan Africa list raw material prices astheir biggest macro concern.
Clearly, in the midst of all these issues, establishing a cost-stable value chain while also balancing quality and risk requiresa shift from the way retailers and manufacturers have tradition-ally managed sourcing and supply chains. Sourcing organiza-tions have an opportunity to both cut costs and improveresponsiveness, supporting overall business goals around cus-tomer experience and omnichannel fulfillment.
In this new environment, traditional cost-saving measureswill no longer be enough to remain competitive. Companies canonly negotiate material and labor costs so low — they must alsoexplore more creative approaches to cost saving. Three of these
opportunities include pursuing new sourcing countries andpartners, increasing value-added services and upping efficiency.
Pursing New Sourcing Countries and PartnersAs discussed, rising labor rates in China are driving many
companies to look elsewhere for sourcing. Our survey showsthat the top three regions from which respondents are current-ly sourcing include Western China, Eastern China and theAmericas. They are most interested in expanding intoBangladesh,Vietnam and Cambodia, with India and Indonesiarounding out the top five.
In addition to cost concerns, favorable regulations andefforts to increase speed-to-market can also make new sourc-ing countries attractive.
For example, Cabela’s is looking into moving some produc-tion into Central or South America to take advantage of DR-CAFTA regulations and shorten lead times to increase respon-siveness to customer demand. And retailers including H&M,Tesco and Primark are sourcing from Ethiopia to take advan-tage of the attractive fabric provision, which allows most AGOAcountries to ship apparel made from fabric outside the region tothe United States duty free.
When pondering the jump to another sourcing region,respondents weigh four primary risk factors: labor costs in thesourcing country (24 percent of respondents), the U.S. econo-my and domestic consumption levels (23 percent), the stabilityof the sourcing region (12 percent) and capabilities of the sup-pliers in that region (12 percent).4
FIGURE 3: What Value Adding Services do you consider the most important expectation from youragents/importers/vendors?
<Cost<Lead time<Quality program<Social compliance
<Product development/executioncapabilities
<Mature, established region/historicalpartner relationship
<Accessibility of raw materials (i.e.,fabrics, trim, etc.)
<Financial terms<Trade preferences
2007
2008
2009
2010
2011
2012
2013
When it comes to assessing capabilities, it can be difficult tobalance the desire to cut costs with other concerns, includinglead time, quality and social compliance. This year, the impor-tance of cost in that equation rose to a seven-year high, with 35percent of respondents choosing it as the most important factor.
Increasing Value-Added ServicesCompanies are also looking for sourcing partners that can
provide key value-added services, including QA management,product development and design and deep raw materialknowledge. QA management in particular is becoming increas-ingly important as companies look to manage their brand per-ception to avoid negative press and potential recalls. Productquality and safety as well as social compliance are rapidly occu-pying the minds of sourcing executives as QA managementtopped this year’s list, and experienced 10 percent growth inimportance from last year.
By outsourcing these activities to overseas agents or sourc-ing agents, companies are then freed up to focus on more valu-able areas of the product development process.
Upping Efficiency Finally, it is well known that efficiency can drive cost sav-
ings. This may sound obvious, but the survey reveals that manycompanies have significant room for improvement here —especially larger companies. For example, 40 percent of mid-sized companies report sourcing more than $3.5 million perFTE but only 28 percent of large companies source at that level.
Of course, enabling these key strategic shifts will alsorequire new organizational capabilities, processes and support-ing technology. Evaluating capabilities to ensure strategic use ofthe sourcing organization and transitioning other tasks to a
more shared service model can begin to evolve the organizationtoward more efficient sourcing operations. Additionally, leadersare cultivating more strategic relationships and tiering theirsupply base as a means to simplify sourcing, where possible.
Technology is even more important as the classic definitionof “supply chain” grows to encompass even more elements inneed of something to tie them all together. For many respon-dents, a truly world class supply chain is cost competitive, differ-entiated and structured to facilitate continuous improvement.
These measures all support a top-notch customer experi-ence. In fact, 29 percent of respondents said customer fulfill-ment effectiveness was the most important measure of supplychain success.
Achieving this will require multiple technology solutions —each targeting a separate component of the supply chain —and seamless integration between them. But the benefits arewell worth it: streamlined communication, improved collabora-tion, increased speed of activity completion and increased con-trol and visibility.
In addition to these initial benefits, technology can unlockadditional value if it is supported by organizational andprocess changes. For example, very few retailers and whole-salers (only 29 percent) are thinking about using technologyto drive better decision making, but we see this as a key com-petitive imperative in the very near term. 4
An Apparel Exclusive Report
30 EXCELLENCE IN GLOBAL SOURCING
<>$5M per FTE<$3.5M-$5M per FTE<$2M-$3.5 M per FTE
<$1-$2M per FTE<<$1 million per FTE
FIGURE 5: 2013 Sourcing Efficiency by Revenue Band
More than $1 billion $101 million to $1 billion
Less than $100million
20%
8%
24%
24%
24%
33%
7%
10%
30%
20%
8%
11%
10%
7%
64%
FIGURE 4: Value Added Services - 2012-2013% Change
Transportation/customs management1%
Niche regional or product knowledge-1%
Inventory ownership1%
Financing or extended payment terms1%
Raw material knowledge or vendor base -2%
QA management9%
Product development and design-3%
An Apparel Exclusive Report
32 EXCELLENCE IN GLOBAL SOURCING
FIGURE 6: A World Class Supply Chain Is . . . FIGURE 7: The most important metric to measureSupply Chain success for my organization is . . .
40%All of the above
37%Cost savings
33%Competitive differentiation
29%Structured continuous improvement
28%Structured supplier relationship management
27%End customer service
22%
Customer FulfillmentEffectiveness
29%
Agility andResponsiveness
25%
OperationalEffectiveness
18%
FinancialEffectiveness
14%
Efficiency13%
Velocity1%
Cross-functional metrics
21%Managing trade-offs
20%Supplier segmentation
14%Segmented supply chains
FIGURE 8: Expected Results of Supply ChainTechnology Implementations
56%Improved communication & collaboration
56%Increased speed of activities
48%Increased control and visibility
41%Increased ability to perform activities
30%Increased standardization
29%Improved/new decision making
26%Improved risk management
24%Advanced ability to do new activities
5%Other
7%Stockless initiatives
Yes, the myriad challenges facing today’s sourcing execu-tives can seem daunting. But they also represent a consider-able opportunity to improve efficiency and cut costs whilebolstering the sourcing organization’s strategic role in sup-porting business objectives. Realizing that opportunity willrequire a clear roadmap that prioritizes future changes,including organizational, process and technology changes,based on overall supply chain goals. <
ABOUT
Kurt Salmon is the leading global management consulting firm specializing in the retail and consumer products industry. The firm leverages itsunparalleled industry expertise to help business leaders make strategic, operational and technology decisions that achieve tangible and meaningfulresults. For more information go to www.kurtsalmon.com.
ABOUT THE AUTHORS
JOANNA SHAPIRO and COURTNAY THOMAS advise the world’sleading retailers and consumer products companies on their sourcingand supply chain strategies. They can be reached [email protected] [email protected].
